Deal, No Deal

It has been a topsy-turvy story for the most traded and (politically and economically) significant commodity in the world. Welcome to the world of Crude Oil. Back in 2014 when the war between Sheikhs and Shale begun, Saudi Arabia deliberately balked to play the role of, what has been called, Swing Producer of the world. By refusing to turn off the taps Saudis envisaged a future that will, acting out of the principle of survival of the fittest, drive out high-cost producers (most importantly US Shale).

But the strategy went awry. To their, and everyone surprise, even opposite. After a year in 2015 it was Kingdom burning through their cash reserves at a precarious rate. Subsidies were cut, holidays curtailed, salaries slashed. Government largesse, of which the Saudi masses are acquainted with, were shrunk at an uncomfortable rate. There was an imminent chance of a social unrest, if things had continue to be so. Fortunately, they didn’t. After much ado, OPEC was able to strike a last minute deal with Non-OPEC producers. Oil prices, after touching a nadir of $26, climbed up, gradually smashing through the $50 psychological mark. Articles and opinions were replete with positivity and that the act of rebalancing has begun. But across the pacific matters were quite different.

US Shale boom, Fracking 2.0. It has been called many names. The technological innovations in drilling and fracking coupled with certain softwares rendered the US shale industry a chance to stand in the face of low oil prices. The world saw how costs in US plunged almost 30-40%. In some areas such as Permian Basin it is even low. Instead of ousting the Shale producers, the days after the Vienna oil accord (signed 30th November 2016) saw an utterly different phenomena: rise in Shale production. Let us have a look at fundamentals. Right now the inventories stand at 527.8 million barrels down from the historic high of 535 million-not at all a bullish level, indeed. The rig count is also high: 697, highest since August 2015. The US shale production increased by 17,000 barrels per day this month. Total production has risen from 8 million barrels per day to 9.2 million barrels. Expected to touch 9.7mbpd by 2018. Bearishness spread all over! We are back at square one: oil prices are back to the pre-deal level and there has been a deluge of selling in the markets. Bloomberg reported today (5th May, 2017) “The number of contracts traded in a minute — usually in the hundreds early in the trading day — surged above 7,000 on WTI at 4:28am London time”.

Now coming back to Middle-East. The KSA, after the prices stabilized has become stable as well. Deputy Crown Prince Muhammad Bin Salman is trying to ease things up. In a gerontocracy which doesn’t likes the idea of a young man getting hold of the bridles of the country, it is no doubt an achievement for the young scion that he has been able to kick-start projects that will diversify the Saudi economy disconnecting, to a great extent, its dependence on oil. About 90% of Saudi revenue comes from Oil exports. But now The Saudi Vision 2030 and the National Transformation Plan, attempts to wean itself from oil, calls for a bright future, provided both the plans are implemented in letter and spirit. But why are we talking about these projects and plans? Because they lead us to what is being dubbed as the creation of the largest sovereign fund in the world. Behold, Aramco. According to some estimates it is the largest company on earth big enough to swallow Alphabet Inc., Berkshire Hathaway, Microsoft and still leaving some room for Apple Inc! Albeit its history has been shrouded in controversy due to the absence of any proper documentation and transparency now it is going public. There will be an IPO, late 2018, in which 5% shares of Saudi Aramco will be floated which is supposed to create a $1trillion sovereign fund. Once again, why Aramco? That is because it takes us to the deal. To the question that whether, on 25th May when the OPEC and NOPEC oil producers meet, the deal that was originally decided to be implemented for first six months of the year, will be extended or not? It takes us to the nuances that why KSA in the first place not only convinced OPEC and NOPEC producers to reach an entente but also went an extra mile cutting production more than what it had initially promised. It was because KSA needs oil prices more than $50 not only for the impending IPO but also for maintaining their economic health. It has reduced its tax from 85% to 50% to make Aramco more lucrative. Moreover, other Middle Eastern producers also need a stable oil as their revenue mostly depends upon oil, no surprise! Libya and Nigeria were exempted from the deal but they are in doldrums partially because of security issues and partially, economically. See what is happening in Venezuela. In a single phrase it is ripping apart, all because of low oil prices. With a war engulfed Syria a fuming refugee crisis, Middle East cannot afford another tumult as the consequence of low oil prices. Hence, my guesstimate is that there will be an extension, may be it is not for whole 6 months. Although, Saudi Oil Minister admonished the ‘free-riders’ at CERAweek and recently echoed that it is too early to decide, I think the Kingdom has to succumb to ground realities. This will give a support to oil prices for the remaining year.

I will conclude with a catch-22 situation: Suppose there is an extension and that the oil prices rise. What this augurs for the Shale producers (Read USA)? Euphoria! With cries of hurray their derricks are going to ooze out more black gold as higher prices makes it feasible to do so. Subsequently the rising prices will start to feel downward pressure and either come down or, in the best case, become stagnant.

A question to the readers: What is then the fun in extending the deal? Bitter, yet a reality.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy.
His interests range from Economic history to Classical literature.

Four Things You Should Know About Battery Storage

The global
energy landscape is undergoing a major transformation. This year’s Innovate4Climate (I4C) will have a priority focus on
battery storage, helping to identify ways to overcome the technology, policy
and financing barriers to deploy batteries widely and close the global energy
storage gap.

Here are
four things about battery storage that are worth knowing.

First, energy storage is key to realizing the potential
of clean energy

Renewable sources of energy, mainly solar and wind,
are getting cheaper and easier to deploy in developing countries, helping
expand energy access, aiding global efforts to reach the Sustainable Development Goal on
Energy (SDG7) and to mitigate climate
change. But solar and wind energy are variable by nature, making it necessary
to have an at-scale, tailored solution to store the electricity they produce
and use it when it is needed most.

Batteries are a key part of the solution. However, the
unique requirements of developing countries’ grids are not yet fully considered
in the current market for battery storage – even though these countries may
have the largest potential for battery deployment.

Today’s market for batteries is driven mainly by the
electric vehicles industry and most mainstream technologies cannot provide long
duration storage nor withstand harsh climatic conditions and have limited
operation and maintenance capacity. Many developing countries also have limited
access to other flexibility options such as natural gas generation or increased
transmission capacity.

Second, boosting battery storage is a major
opportunity

Global demand for battery storage is expected to reach
2,800 gigawatt hours (GWh) by 2040 – the equivalent of storing a little more
than half of all the renewable energy generated [today] around the world in a
day. Power systems around the world will need many exponentially more storage
capacity by 2050 to integrate even more solar and wind energy into the
electricity grid.

For battery storage to become an at-scale enabler for
the storage and deployment of clean energy, it will be imperative to accelerate
the innovation in and deployment of new technologies and their applications. It
will also be important to foster the right regulatory and policy environments
and procurement practices to drive down the cost of batteries at scale and to
ensure financial arrangements that will create confidence in cost recovery for
developers. It will also be essential to find ways to ensure sustainability in
the battery value chain, safe working conditions and environmentally
responsible recycling.

With the right enabling environment and the innovative
use of batteries, it will be possible to help developing countries build the
flexible energy systems of the future and deliver electricity to the 1 billion
people who live without it even today.

Third, battery storage can be transformational for the
clean energy landscape in developing countries

Today, battery technology is not widely deployed in
large-scale energy projects in developing countries. The gap is particularly
acute in Sub-Saharan Africa, where nearly 600 million people still live without
access to reliable and affordable electricity, despite the region’s significant
wind and solar power potential and burgeoning energy demand. Catalyzing new
markets will be key to drive down costs for batteries and make it a viable
energy storage solution in Africa.

Already, there is tremendous demand in the region
today for energy solutions that do not just boost the uptake of clean energy,
but also help stabilize and strengthen existing electricity grids and aid the
global push to adopt more clean energy and fight against climate change.

Fourth, the World Bank is stepping up its catalytic
role in boosting battery storage solutions

There is a clear need to catalyze a new market for
batteries and other storage solutions that are suitable for electricity grids
for a variety of applications and deployable on a large scale. The World Bank
is already taking steps to address this challenge. In 2018, the World Bank
Group announced a $1 billion
global battery storage program, aiming to raise $4 billion more in private and public funds to create
markets and help drive down prices for batteries, so it can be deployed as an
affordable and at-scale solution in middle-income and developing countries.

By 2025, the World Bank expects to finance 17.5 GWh of
battery storage – more than triple the 4-5 GWh currently installed in
developing countries. With the right solutions, it can be possible to build
large-scale renewable energy projects with significant energy storage
components, deploy batteries to stabilize power grids in countries with weak
infrastructure, and increase off-grid access to communities that are ready for
clean energy with storage.

The World Bank has already financed over 15% of
grid-related battery storage in various stages of deployment in developing
countries to date.

In Haiti, a combined solar and battery storage project
will ultimately provide electricity to 800,000 people and 10,000 schools,
clinics and other institutions. An emergency solar and battery storage power
plant is being built in the Gambia, as are mini-grids in several island states
to boost their resilience.

In India, a joint WB-IFC team is developing one of the
largest hybrid solar, wind and storage power plants in the world, while in
South Africa, the World Bank is helping develop 1.44 gigawatt-hours of battery
storage capacity, which is expected to be the largest project of its kind in
Sub-Saharan Africa.

Related

Driving a Smarter Future

Today the average car runs on fossil fuels, but growing pressure for
climate action, falling battery costs, and concerns about air pollution in
cities, has given life to the once “over-priced” and neglected electric
vehicle.

With many new electric vehicles (EV) now out-performing their fossil-powered
counterparts’ capabilities on the road, energy planners are looking to bring
innovation to the garage — 95% of a car’s time is spent parked. The result is
that with careful planning and the right infrastructure in place, parked and
plugged-in EVs could be the battery banks of the future, stabilising electric
grids powered by wind and solar energy.

Today the average car runs on fossil fuels, but growing pressure for
climate action, falling battery costs, and concerns about air pollution in cities,
has given life to the once “over-priced” and neglected electric vehicle.

With many new electric vehicles (EV) now out-performing their
fossil-powered counterparts’ capabilities on the road, energy planners are
looking to bring innovation to the garage — 95% of a car’s time is spent
parked. The result is that with careful planning and the right infrastructure
in place, parked and plugged-in EVs could be the battery banks of the future,
stabilising electric grids powered by wind and solar energy.

Advanced forms of smart charging

An advanced smart charging approach, called Vehicle-to-Grid (V2G),
allows EVs not to just withdraw electricity from the grid, but to also inject
electricity back to the grid. V2G technology may create a business case for car
owners, via aggregators (PDF), to provide ancillary services to the grid. However, to be
attractive for car owners, smart charging must satisfy the mobility needs,
meaning cars should be charged when needed, at the lowest cost, and owners
should possibly be remunerated for providing services to the grid. Policy
instruments, such as rebates for the installation of smart charging points as
well as time-of-use
tariffs (PDF), may incentivise a wide deployment
of smart charging.

“We’ve seen this tested in the UK, Netherlands and Denmark,” Boshell
says. “For example, since 2016, Nissan, Enel and Nuvve have partnered and
worked on an energy management solution that allows vehicle owners and energy
users to operate as individual energy hubs. Their two pilot projects in Denmark
and the UK have allowed owners of Nissan EVs to earn money by sending power to
the grid through Enel’s bidirectional chargers.”

Perfect
solution?

While EVs have a lot to offer towards accelerating variable renewable
energy deployment, their uptake also brings technical challenges that need to be
overcome.

IRENA analysis suggests uncontrolled and simultaneous charging of EVs
could significantly increase congestion in power systems and peak load.
Resulting in limitations to increase the share of solar PV and wind in power
systems, and the need for additional investment costs in electrical
infrastructure in form of replacing and additional cables, transformers,
switchgears, etc., respectively.

An increase in autonomous and ‘mobility-as-a-service’ driving — i.e.
innovations for car-sharing or those that would allow your car to taxi
strangers when you are not using it — could disrupt the potential availability
of grid-stabilising plugged-in EVs, as batteries will be connected and
available to the grid less often.

Impact of charging according to type

It has also become clear that fast and ultra-fast charging are a
priority for the mobility sector, however, slow charging is actually better
suited for smart charging, as batteries are connected and available to the grid
longer. For slow charging, locating charging infrastructure at home and at the
workplace is critical, an aspect to be considered during infrastructure
planning. Fast and ultra-fast charging may increase the peak demand stress on
local grids. Solutions such as battery swapping, charging stations with buffer
storage, and night EV fleet charging, might become necessary, in combination
with fast and ultra-fast charging, to avoid high infrastructure investments.

To learn more about smart charging, read IRENA’s Innovation
Outlook: smart charging for electric vehicles. The report explores the degree of complementarity potential between
variable renewable energy sources and EVs, and considers how this potential
could be tapped through smart charging between now and mid-century, and the
possible impact of the expected mobility disruptions in the coming two to three
decades.

Related

What may cause Oil prices to fall?

Oil prices have rallied a whopping 30 percent this year. Among other factors, OPEC’s commitment to reduce output,
geopolitical flash-points like the brewing war in Libya, slowdown in shale production and optimism in U.S. and China trade war
have all added to the increase. The recent rally being sparked by cancellation of waivers granted to countries importing oil form Iran has taken prices to new
highs.

However, one might question the
sustainability of this rally by pointing out few bearish factors that might
cause a correction, or possibly, a fall in oil prices. The recent sharp slide
shows the presence of tail-risks!

Libya produces just over 1 percent of world oil output at 1.1 million barrels, which is indeed not of such
a magnitude as to dramatically affect global oil supplies. What is important is
the market reaction to every geopolitical event that occurs in the Middle East
given the intricate alliances and therefore the increasing chances of other
countries jumping in with a national event climaxing into a regional affair.

Matters in Libya got serious as an airstrike was carried out on
the only functioning airport in the country a few days ago. Khalifa Haftar who
heads Libyan National Army has assumed responsibility for the strike. However,
UN and G7 have urged to restore peace in Tripoli. Russia has categorically said to use “all available means” while U.S.’ Pompeo called for “an immediate halt” of atrocities in Libya.

The fighting has been far from locations
that hold oil but the overall sentiment is that of fear which is understandable
as this happens in parallel to a steep decline in Venezuelan production,
touching multi-year low of 740,000 bpd. However, as international
forces play their part we might expect a de-escalation in the Libyan war — as
it has happened before.

Besides the chances of an alleviation of
hostilities in Libya, concerns pertaining to global economic growth, and
thereof demand for oil, have still not disappeared. The U.S. treasury yield,
one of the best measures to predict a future slowdown (recession), inverted last month; first time since 2007. If this does not raise doubts over the global
economic health then the very recent announcement by International Monetary Fund (IMF) who has slashed its outlook for
world economic growth to its lowest since the last financial crisis. According
to the Fund the global economy will grow 3.3 percent this year down from 3.5
percent that predicted three months ago.

image: Bloomberg

Then there is Trump, whose declaration of
Iran’s IRGC as a terrorist organization might increase the likelihoods of yet another spate of heated rhetoric
between the arch-rivals. But if he is genuinely irked by higher oil prices as
his tweets at times show and if he thinks that higher gasoline prices can hurt his political capital then this will certainly have a bearish
effect on the markets as observers take a sigh regarding the mounting, yet
unsubstantiated, concern over supply.

One of the factors that contributed most
to the recent rally was OPEC’s unwavering commitment to its production cuts.
The organization’s output fell to its lowest in a year at 30.23 million barrels per day in February 2019, its lowest in four years. But the
question remains for how long can these cuts go on? Last month it was reported the Kingdom of Saudi Arabia had admitted that they need oil at $70 for
a balanced budget while estimates from IMF claims that the level for a budget break-even are even higher: $80-$85. We
should not forget Trump and his tweets in this regard as well. Whenever prices
have inched up from a certain threshold POTUS’ tweet forced the market to
correct themselves (save the last time). One of the key Russian officials who
made the deal with OPEC possible recently signaled that Russia may urge others to increase production as they meet in the
last week of June this year. While this is not a confirmation that others will
agree but it certainly shows that one of the three largest oil producers in the
world does feel that markets are now almost balanced and the cuts are not
needed further.

Now with the recent cancellation of
waivers we should expect U.S. to press KSA to increase production to offset the
lost barrels and stabilize the prices.

Finally stoking fears of an impending
supply crunch (a bullish factor) is the supposed slowdown in U.S. Shale production.
But the facts might be a tad different. Few weeks ago U.S. added 15 oil rigs in one day, a very strong number indeed-this comes after a decline of
streak of six consecutive weeks. According to different estimates the shale
producers are fine with prices anywhere between $48 to $54 and the recent rise
in prices has certainly helped. Well Fargo Investment Institute Laforge said that higher prices will result in “extra U.S. oil production in coming
months”. Albeit, U.S.’ average daily production has decreased a bit but it doesn’t mean that the shale producers cannot bring back
production online again. Prices are very conducive for it.

So if you think that prices will continue
to head higher, think again. Following graph shows that oil had entered the overbought territory few
days back–hence the recent slide.

Therefore, If the war in Libya settles
down (and there is a strong possibility that it will); rumors of a production
increase making its way into investors’ and traders’ mind (as it already have) and
global economy continue to struggle in order to gain a strong footing — the
chances are oil will fall again. The current rally might last for some-time
but, like always, beware not to buy too high.